Appendix to Law Commission Submission

APPENDIX
RESIDENTIAL SERVICE CHARGES:
In order to understand what is wrong with the present legislation, it is necessary to set out in summary form the principal statutory protections that currently exist.
Principal Current Statutory Protections
These are mostly found in ss.18-30 of the Landlord and Tenant Act 1985 (as amended by the Landlord and Tenant Act 1987 and the Commonhold and Leasehold Reform Act 2002) and may conveniently be summarised as follows:
 Section 19 limits service charges to the extent that they are reasonably incurred and where they are incurred; the services must be of a reasonable standard, this is linked to Section 27A which confers a right to apply to the First Tier Tribunal to determine liability to pay service charges.
 Sections 20 and 20ZA limit the relevant contributions of tenants in respect of:
 qualifying works or
 agreements to £250
unless consultation requirements have either been complied with or dispensed with in relation to the works or agreement by the First Tier Tribunal (LVT/RAC in Wales).
these provisions are supplemented by the following SIs:
 s. 20(3) Service Charge (Estimates and Consultation) Order 1988/1285
 s. 20(4) Service Charges (Consultation Requirements) (Amendment) (England) Regulations 2004/2665
 Service Charges (Consultation Requirements) (Amendment) (No. 2) (England) Regulations 2004/2939
 Service Charges (Consultation Requirements) (Amendment) (Wales) Regulations 2005/1357
 Service Charges (Consultation Requirements) (England) Regulations 2003/1987
 Service Charges (Consultation Requirements) (Wales) Regulations 2004/684
 s. 20(5) Service Charges (Consultation Requirements) (Amendment) (England) Regulations 2004/2665
 Service Charges (Consultation Requirements) (Amendment) (No. 2) (England) Regulations 2004/2939
 Service Charges (Consultation Requirements) (Amendment) (Wales) Regulations 2005/1357
 Service Charges (Consultation Requirements) (England) Regulations 2003/1987
 Service Charges (Consultation Requirements) (Wales) Regulations 2004/684
 s. 20(10) Service Charge (Estimates and Consultation) Order 1988/1285

 Section 20B limits the ability to levy service charges in respect of the relevant costs incurred morethan 18 months before a demand for payment.
 Section 20C allows tenants to apply for an order that all or any of the costs incurred by the landlord in connection with proceedings before a court or tribunal not be regarded as relevant costs to be taken into account in determining the amount of the service charge.
 Section 21 permits a tenant to require the landlord in writing to supply a written summary of the costs incurred; the landlord must comply with the request within one month (or as otherwise provided by s.21) and provide a summary prepared in accordance with the section.
 Section 21A permits a tenant to withhold a payment of service charge if the landlord has not supplied a document as required under s.21 or if the formal content of the document supplied by the landlord does not conform substantially with the requirements prescribed.
 Section 21B requires a demand for payment of service charge to be accompanied by a summary of the rights and obligations of tenants of dwellings in relation to service charges.
 Section 22 permits the tenant or secretary of a recognised tenants association to require reasonable facilities to inspect accounts etc. and take copies.
 Section 29 confers the right to have a tenants’ association recognised by notice in writing given by the landlord to the secretary of the association or by a certificate of a member of the local rent assessment committee.
 Section 30A provides tenants with rights relating to insurance of their dwellings.

The following additional protections are to be found in the 1987 Act and the Housing Act 1996:
Part IV, Sections 35-39 of the 1987 Act gives power to vary leases of flats, while s.40 gives power to vary insurance provisions only for other dwellings.
Section 42 of the 1987 Act provides that service charge contributions are to be held in trust.
Section 81 of the Housing Act 1996 provides that the landlord cannot exercise a right of re-entry or forfeiture for non-payment of a service charge unless the amount of the charge has been agreed or admitted and has been the subject of a determination by a court or tribunal.

Pending Amendments/Provisions Not Yet in Force
It should be noted that there have been amendments pending in relation to s. 19(5), s. 21, s. 22, s. 23, s. 23A, s. 24 s. 25(1) s. 26(1), 27, 28, s.39 for almost 10 years.

s. 22(1)(a), s. 22(3) s. 22(4) s. 22(4)(b) s. 23(1) s. 23A(4)(a) s. 23A(4)(c) s. 26(1) s. 27 28(1) s.28(4)(d) s. 28(5A) s. 28(6) have words substituted by Housing and Regeneration Act 2008 c. 17 Sch. 12 para. 4(3) date to be appointed: substitution came into force on December 1, 2008 for the purpose of making regulations but some cannot take effect until the commencement of Commonhold and Leasehold Reform Act 2002 c.15 which is to substitute new ss.22, 23, 23A, 24, amends s.26 & 27 and others until date to be appointed.

ss.42A & 42B of the 1987 Act are only partially in force.

Observation on Principal Current Statutory Protections
Before descending into detail, it should be observed that the current legislation is messy, complex and – for a layman – all but impenetrable.
To an unsatisfactory legislative scheme has been added a too-frequent tendency by the courts to interpret those protections which have been given restrictively, an approach which can perhaps be encapsulated in the majority view of the Supreme Court in Daejan v Benson [2013] UKSC 14 (a decision on the Consultation Provisions referred to above):
“ 52. As already indicated, I do not agree with the courts below in so far as they support the proposition that sections 20 and 20ZA were included for the purpose of “transparency and accountability”, if by that it is intended to add anything to the two purposes identified in section 19(1)(a) and (b). It is true that that proposition may arguably receive some support from Lewison J in Paddington Basin Developments Ltd v West End Quay Ltd [2010] EWHC 833 (Ch), [2010] 1 WLR 2735, para 26. However, I consider that there are no grounds for treating the obligations in sections 20 and 20ZA as doing any more than providing practical support for the two purposes identified in section 19(1). The sections are not concerned with public law issues or public duties, so there is no justification for treating consultation or transparency as appropriate ends in themselves.”
which flies in the face of the Nugee Report which lead to the passing of the current legislation’s statutory progenitors. The problems which the Nugee Report identified were summarised thus in Heron Maple House v Central Estates [2002] 1 E.G.L.R. 35, [2002] 13 E.G. 102.
“10 Practitioners in this field will be familiar with the chequered history of service charges. The service charge is a very necessary instrument where blocks of property (but especially blocks of flats) are let on leases but are managed together and have common services. The cost of servicing the block has to be borne initially by the landlord (or, in some cases, the service company) and then has to be divided up and recovered from the tenants; sometimes the tenants are asked to make payments in advance or on account, especially if the repairs are large.

“11 But, at the same time, this necessary and beneficial institution can be subject to abuse. The casebooks are full of examples: repairs done by companies owned by the landlord, landlord’s business expenses tacked on to the service charge, in some cases frankly dishonest overcharging, and in others a complete lack of particularity as to what the charge covered. There is no doubt that, over the years, it has become a fertile ground for dispute.”

I think it is fair to say that a majority of landlord & tenant practitioners regard the dissenting judgments of Lord Hope and Lord Wilson in the Daejan v Benson, not only as being more compelling, but more correct.
Unfortunately the combination of tortuous complexity and inexplicable gaps in the legislation has meant that service charges have not ceased to provide a fertile ground for dispute and they will continue to do so until better legislation is passed.
By way of illustration the Phillips v Francis/Point Curlew Tenants’ Association v Francis litigation in which I have been involved since early 2009 is still running and has effectively made new law on service charges three times (twice on its way to the Court of Appeal: [2014] EWCA Civ 1395 and [2012] EWHC 3650 (Ch); and once in [2010] L. & T.R. 28). Latterly 5 years of service charges (2008-2012) were before the First Tier Tribunal at the beginning of this month, while permission has been granted to appeal an earlier determination of the First Tier Tribunal in relation to the 2015 service charges – the charges for 2013 & 2014 remain to be determined.

Examples of Particular Problems
Consultation Provisions
One has to have a certain sympathy for the Supreme Court in Daejan v Benson [2013] UKSC 14 and the Court of Appeal in Francis v Phillips [2014] EWCA Civ 1395 because the consultation provisions patently failed to provide any indication: (1) as to how a Court should approach dispensation in the event that consultation did not occur and (2) how one should determine what works are “qualifying works” caught by the provisions in the first place .
In Daejan v Benson the Supreme Court had to invent a scheme for dispensation because Parliament provided none. The majority’s rejection of the need for transparency as being material to the exercise of discretion (which all the history of the provision suggests is wrong) means that landlords are likely to “get away” with not consulting – other than being penalised in costs – unless tenants can discharge the evidential burden of showing they have suffered some prejudice. The very act of not consulting is likely to impair tenants’ ability to get contemporaneous evidence that works might have been done more cheaply and it is, perhaps, not surprising that the first two post-Daejan applications for dispensation succeeded – see OM Property Management Ltd, Re [2014] UKUT 9 (LC); Jastrzembski v Westminster City Council [2013] UKUT 284 (LC) – when the likelihood is that pre-Daejan they would in all probability have failed.
Even the Supreme Court’s strictures on costs are likely to be eroded by suitably worded letters before application when disapplication of the consultation requirements are sought.
The Court of Appeal’s decision in Francis v Phillips [2014] EWCA Civ 1395 has left a huge potential loophole in the consultation provisions by approving of the first instance sets-of-work based approach used in the case at first instance. The judge at first instance fragmented the various sets of work carried out by the landlord, declining to treat them as a single set of works because the landlord “didn’t work that way” but had a “one job creates another” approach. The Court of appeal decided this was a decision of fact and not open to challenge on appeal. The difficulty with that approach is that an organised landlord who, say, plans a programme of works over the course of a year is more likely to be caught by the consultation provisions – because the very existence of a single strategy makes it more likely that there is one set of works – than a disorganised landlord who bumbles through a year on a job-by-job basis. This points up the deficiency of the Daejan v Benson approach. If transparency had been held to be part of the underlying legislative intent, the absence of a stategy would militate in favour of there having been a single set of works.

In relation to Qualifying Long Term Agreements there need to be anti-avoidance provisions because rolling year on year contracts (and there are standard precedents for such contracts) are not caught but are, in effect, long-term agreements.

Section 20B
The problems outlined above are compounded by the decision in relation to s.20B in Gilje v Charlegrove Securities [2003] EWHC 1284 (Ch) in which it was held that Section 20B of the Landlord and Tenant Act 1985 does not apply where service charges are paid on account and the actual expenditure does not exceed the payments on account so that no request is made for any additional payment. Effectively a landlord can make an advance service charge demand, spend the money on completely different works and not be caught by the application of section 20B. Although there is case law to the effect that uncertainty as to when or if works will be carried out goes to the reasonableness of the demand for payment on account – see Parker & Beckett v. Parham (2003) LTL 11/7/2003 (Lands Trib) (George Bartlett, P.), particularly @ 23 – if by the time the issue of the advance payment has come to be litigated there has been expenditure on completely different works, s.20B becomes an utterly toothless protection.

Section 20C – Disallowance of Landlord’s Costs
Section 20C only benefits tenants who are parties to proceedings – Scmlla (Freehold) Limited [2014] UKUT 0058 (LC); Conway v Jam Factory Freehold Limited [2013] UKUT 0592 (LC) – although tenants who were not parties could make a s.20C application of their own. Arguably, if, for example, a landlord has sought excessive service charges and lost, it only leads to a duplication of proceedings if other tenants have to make a separate application for disallowance of costs.
I do not suggest that there is a clear-cut case for reform but it is something that ought to be considered and consulted upon if the legislation is looked at by the Law Commission.

Reasonableness under Sections 19 & 27A
The provisions now found in ss. 19 and 27A have been through a number of incarnations (a fair indication that the original legislation fell short of the mark). The current sections currently provide:
19.— Limitation of service charges: reasonableness.
(1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period—
(a) only to the extent that they are reasonably incurred, and
(b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard;
and the amount payable shall be limited accordingly.
(2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.

27A Liability to pay service charges: jurisdiction
(1) An application may be made to [the appropriate tribunal] 2 for a determination whether a service charge is payable and, if it is, as to—
(a) the person by whom it is payable,
(b) the person to whom it is payable,
(c) the amount which is payable,
(d) the date at or by which it is payable, and
(e) the manner in which it is payable.
(2) Subsection (1) applies whether or not any payment has been made.
(3) An application may also be made to the appropriate tribunal for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs and, if it would, as to—
(a) the person by whom it would be payable,
(b) the person to whom it would be payable,
(c) the amount which would be payable,
(d) the date at or by which it would be payable, and
(e) the manner in which it would be payable.
(4) No application under subsection (1) or (3) may be made in respect of a matter which—
(a) has been agreed or admitted by the tenant,
(b) has been, or is to be, referred to arbitration pursuant to a post-dispute arbitration agreement to which the tenant is a party,
(c) has been the subject of determination by a court, or
(d) has been the subject of determination by an arbitral tribunal pursuant to a post-dispute arbitration agreement.
(5) But the tenant is not to be taken to have agreed or admitted any matter by reason only of having made any payment.
(6) An agreement by the tenant of a dwelling (other than a post-dispute arbitration agreement) is void in so far as it purports to provide for a determination—
(a) in a particular manner, or
(b) on particular evidence,
of any question which may be the subject of an application under subsection (1) or (3).
(7) The jurisdiction conferred on the appropriate tribunal in respect of any matter by virtue of this section is in addition to any jurisdiction of a court in respect of the matter.

The most major unremedied deficiencies are:
(1) The absence of a corresponding power to order “adjustment .. by repayment, reduction or subsequent charges or otherwise.” under s.19(2)
(2) Apportionment
which can only be determined if the lease does not provide for apportionment or the mechanism is one which offends the anti-avoidance provisions – Windermere Marina Village Ltd v Wild [2014] UKUT 0163 (LC), and

There is a further issue which may arise as a result of the further PCTA v Francis litigation in that the landlords have argued that there is no need for the FtT to be satisfied that individual items claimed are contractually recoverable under the lease if the overall level of expenditure can be characterised as reasonable. It remains to be seen whether this argument succeeds but that there is room for it to have been made is indicative of the still unsatisfactory drafting of the provisions.

Service Charge Monies to be Held on Trust s.42 of the 1987 Act
By itself this is a relatively toothless provision because in practical terms it can be difficult to get disclosure of accounts to determine whether trust monies are, or have been, properly applied. Although it was said in O’Rourke v Darbishire [1920] AC 581 a beneficiary and therefore has an entitlement to inspect trust accounts at common law, Schmidt v Rosewood Trust Ltd [2003] UKPC 26 has modified the former to a degree; Lord Walker, while endorsing a beneficiary’s entitlement to have access to trust documents, said at para 66:
“ A Beneficiary’s right to seek disclosure of trust documents, although sometimes not inappropriately described as a proprietary right, is best approached as one aspect of the court’s inherent jurisdiction to supervise (and where appropriate intervene in) the administration of trusts …”.
as to the exercise of its discretion Lord Walker said (at 54):
“ There are three areas in which a court may have to form a discretionary judgment:
(i) whether a discretionary object (or some beneficiary with only a remote or wholly defeasible interest) should be granted any relief at all,
(ii) what classes of documents should be disclosed, either completely or in redacted form, and
(iii) what safeguards should be imposed (whether by undertakings to the court, arrangements for professional inspection, or otherwise) to limit the use which may be made of documents or information disclosed under the order of the court”.
I have been involved in at least one case at first instance in which an application for disclosure was refused on the basis of Schmidt and anecdotally this is not uncommon.

Part IV, Sections 35-39 of the 1987 Act Power to vary leases of flats only
There is no good reason for the provisions to be limited to flats. Leases can last a considerable time (those in Phillips v Francis, for example, are 999 year leases – my ancestors hadn’’t even invaded this country 999 years ago) and circumstances change and there ought to be a high degree of flexibility. One of the complicating factors in Phillips v Francis is that the leases were originally drafted to provide for ownership by a form of RTM company which over-extended itself and was forced to sell the freehold to an independent freeholder; it is unlikely to be the only instance of this happening. Sections 35-39 are in any event quite restrictively drawn and have been interpreted restrictively – see Morgan v Fletcher [2009] UKUT 186 (LC).

FIXED SERVICE CHARGES
These are not currently “service charges” within the service charge legislation at all. The majority of Supreme Court in Arnold v Britton [2015] UKSC 36. Lord Neuberger at 65 and Lord Hodge at 79 mentioned the possible need for legislative intervention to extend legislation to fixed service charges while Lord Carnwath highlighted at paragraphs 90 to 92 some of the provisions in the 1985 and 1987 Landlord & Tenant Acts which might, had the legislation been drawn differently, have given some legislative protection to the appellants.

Surpluses and Fixed Service Charges
Woodfall says that a landlord is entitled to keep surpluses as his own, citing the decision of Walton J in Frobisher (Second Investments) Ltd v. Kiloran Trust [1980] 1 WLR 425 but Frobisher actually says that any right of recoupment lies in contract rather than trust.- see 430B
In Arnold v Britton in the Court of Appeal Davis LJ at 53 expressed the view that if payments made under the fixed service charge exceeded the amount of the landlord’s expenditure, the benefit of any surplus would accrue to the landlord for her own benefit but this comment, strictly, was obiter and is contrary to the Court of Appeal’s decision in Brown’s Operating System Services Ltd v. Southwark Roman Catholic Diocesan Corporation.[2007] EWCA Civ 164, [2007] L&TR 25

Since the decision of the Court of Appeal in Arnold v Britton, Morgan J, has made observations in line with Brown’s Operating System in Friends Life Management Services Limited v. A & A Express Building Limited [2014] EWHC 1463 (Ch), @ 43.
Whether a landlord can retain a surplus or has, at some point, to account for it, would appear to depend on the particular terms of the lease in question. In Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited where the argument was about whether rent could be apportioned following the exercise of a break clause, the apportionment of service charges was conceded before the case reached the Supreme Court on the basis that the terms of the lease implicitly required it.
One problem is that if a tenant’s right of recoupment is found to exist, Brown’sOperating System Services @ 33, says that it only to arises at the end of the term, and could be lost in the event of a lease’s being terminated prematurely by the landlord for cause, for example, for non-payment of rent or a breach of covenant.
This could be considered by the Law Commission in the course of any review.

COVENANTS AFFECTING SALE OF LEASEHOLDS (particularly retirement flats)
In a case concerning leasehold retirement flats there (I cannot cite anything as there has been a settlement with confidentiality clauses) there were draconian provisions limiting the right of occupation after death/infirmity coupled with equally draconian rights in relation to resale vested in the landlord. These would not appear to be uncommon provisions. It is worth noting that had these retirement flats been mobile homes the Mobile Homes act 2013 would have struck down such provisions. There would appear to be an unsatisfactory inconsistency in legislative approach.

SITE/ESTATE RULES IN RELATION TO LEASEHOLDS & FREEHOLDS ON PARKS & ESTATES
Similarly both leaseholds and freeholds on parks or estates can include covenants to observe rules made from time to time by the freeholder of the park or estate. Other than challenging such rules as a derogation from grant, there is no mechanism for challenging them, whereas since the Mobile Homes Act 2013 there has been in relation to mobile homes. Again this inconsistency merits consideration by the Law Commission.

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